The Trump administration insists it has the upper hand as trade frictions with Beijing have reignited over its sweeping controls on rare earth exports.
While President Donald Trump’s initial response was to announce 100% additional tariff and software restrictions on China, which controls more than 90% of the world’s processed rare earths and rare earth magnets, he has already hinted at tougher measures that could take effect.
“But the United States also has monopoly positions, much stronger and more far-reaching than those of China,” he warned in a Truth Social article before his tariff decision. “I just didn’t choose to use them, I never had a reason to – UNTIL NOW!”
Trump has since toned down his rhetoric and even acknowledged that the planned tariffs were unsustainable, while Wall Street dismissed his threats as an attempt to influence negotiations and another opportunity for “TACO” trade.
At the same time, the White House said a planned meeting between Trump and Chinese President Xi Jinping would still take place at the end of the month on the sidelines of a regional economic conference in South Korea.
Yet China’s restrictions on rare earths have stunned some opponents, who said they could “prohibit any country on Earth from participating in the modern economy,” given the minerals’ crucial importance to a wide range of technologies.
Taking a closer look, Capital Economics said Beijing’s policy was actually narrower in scope than initially feared. But China Economic Director Julian Evans-Pritchard and China economist Leah Fahy said in a note Monday that China was also seeking to strengthen its negotiating position and was likely frustrated that the United States did not seem interested in further reducing its tariffs.
“Whatever the motivation, China’s recent actions were a bit of a gamble and there is a risk that they could backfire,” they wrote.
They also listed ways the United States could step up its retaliation and cause even more disruption to China’s economy.
For example, the United States could leverage its control over much of the commercial aviation supply chain by blocking exports of critical components or even entire aircraft.
Additionally, about 90% of laptops and PCs in China still use the Windows operating system, according to Capital Economics. Trump could force Microsoft to halt its sales and updates in China, possibly leading to unpatched security vulnerabilities.
“There are domestic alternatives, but Huawei’s experience suggests that such a change would reduce the global appeal of Chinese-branded mobile devices,” Evans-Pritchard and Fahy said. “China’s biggest concern may be software used for advanced manufacturing: Western companies control more than 70% of China’s chip design software market, for example.”
Meanwhile, Trump could deal another blow to Chinese tech companies and manufacturers by expanding export controls. Indeed, China still relies heavily on chips and chipmaking tools made by the United States and its allies, even though the most advanced technologies are already subject to strict export limits.
And then there is American domination of global finance and its infrastructure. Trump could sanction more Chinese companies by freezing their dollar-denominated assets and limiting access to the SWIFT payment system, Evans-Pritchard and Fahy pointed out.
Washington could also force its allies to impose their own trade restrictions on China, thereby depriving exporters of the opportunity to compensate for reduced shipments to the United States and further isolating China from advanced economies. In fact, Mexico has already proposed tariffs of up to 50% on certain products from China and several other Asian countries.
“Hawkey advisors on both sides of the Pacific will undoubtedly use the current row as an opportunity to try to consolidate a deeper decoupling between the United States and China,” Capital Economics said. “At best, we could return to the uneasy trade truce that has lasted until now. At worst, China could find itself cut off from Western markets and technology even more than it is today.”
